Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether a lump sum amount paid as a settlement in respect of events leading to the loss of entitlement to LTD benefits is taxable under any provision of the Act or is it a non-taxable personal injury general damage award.
Position TAKEN:
The entire lump sum payment is considered to be income from employment.
Reasons FOR POSITION TAKEN:
The recipient was a continuing employee of the payer, the amount were computed with reference to lost employment benefits, and there was no case made with respect to a specific apportionment to damages or the specifics of the damages themselves.
952189
XXXXXXXXXX J.A. Szeszycki
October 18, 1995
Dear XXXXXXXXXX:
Re: Settlement Payment - XXXXXXXXXX
This is in reply to your letters of August 17 in which you requested that we review the details of the settlement between yourself and XXXXXXXXXX that includes the receipt of a lump sum payment by you in 1995. We also acknowledge your subsequent telephone conversations with Mr. Jack Szeszycki of this office clarifying some of the details of the settlement and the further submission on September 22, 1995 of background correspondence describing events leading to the settlement itself.
The essential facts of the case, as we understand them, can be summarized as follows:
1.In XXXXXXXXXX after having informed XXXXXXXXXX your employer, of your medical circumstances, you were granted a permanent leave of absence and placed on short term disability at 100% of regular compensation for a period of 26 weeks.
2.Following the expiration of the 26 week period you were placed on leave without pay but with continued coverage under XXXXXXXXXX employment benefits package which includes long term disability ("LTD"), group term life insurance, and the medical plan.
3.Over two years later, in XXXXXXXXXX as your condition placed you in a position of not being able to perform the normal duties of your employment, you made application for LTD benefits to which you presumed you were entitled. Your application was rejected by the insurance carrier. Under the terms of the LTD plan, as we understand it, an employee on leave without pay for a period in excess of 90 days and who was not considered disabled at the time of cessation of employment duties no longer qualifies for benefits under the plan.
4.In XXXXXXXXXX you informed XXXXXXXXXX that you were contemplating legal action for the damages resulting from the loss of what would otherwise have been your entitlement to LTD benefits.
5.In a letter XXXXXXXXXX has offered to settle the matter without litigation. The terms of settlement include (1) continued status as a XXXXXXXXXX employee, on leave without pay but enjoying coverage under the group term life insurance and the medical/dental plan, (2) permission to be absent from your work place, and (3) a lump sum payment in the amount of $XXXXXXXXXX The amount is described in the letter as representing full payment that includes but "...is not limited to damages, suffering, disadvantage or inconvenience".
You have asked us to confirm whether the payment received will be subject to income tax. It is your view that the payment is in respect of general damages which is described in paragraph 2 of interpretation bulletin IT-365R "Damages, Settlements and Similar Receipts" as being a non-taxable receipt when received in connection with a personal injury.
The interpretation bulletin referred to above, as indicated by its title, discusses the treatment of amounts received by an individual that can be characterized as damages resulting from certain events that have taken place. Of particular relevance in determining how an amount should be treated for tax purposes is the context in which the damaging event takes place.
The most common examples are events that take place outside any income earning context; for example, personal injuries suffered in an automobile accident. Clearly, the general damages resulting from such an event (as listed in paragraph 2 of the bulletin) normally have no connection with employment or any other income earning activity and are therefore not taxed under any provision of the Income Tax Act. In addition, as explained in the bulletin, even though the amount in respect of damages may be calculated with reference to lost earnings capacity that, in itself, does not determine the nature of the income.
In contrast, where the personal injury results from an event taking place within an income earning context, such as employment, then care must be taken in evaluating payments being received; particularly those that are computed with reference to income entitlements, such as salary or wages (including benefits), that would otherwise have been considered taxable when received under normal circumstances.
The circumstances of your case fall in the latter category. The damaging event involved an action whereby your employer, inadvertently or otherwise, placed you in a position in which you no longer were entitled to claim any benefits under the terms of the LTD plan that was in place. Had you been entitled to benefits under the terms of the LTD plan a periodic amount would have been paid to you for a maximum period of 24 months. It is our understanding that XXXXXXXXXX initial offer of settlement was to replace those lost benefits by paying you an equivalent amount in a lump sum. Following some negotiation, the amount settled upon was the equivalent of 36 months of benefits.
While there is a reference in the letter of settlement, as noted earlier in item #5, to the size of the payment reflecting some recognition of damage and suffering or inconvenience, the reference is sufficiently vague as to amount or descriptive detail that a distinction cannot be made from amounts being paid with respect to replaced employment benefits at a time when you are a continuing employee of XXXXXXXXXX Consequently, it is our view that the entire amount of $XXXXXXXXXX is income from employment and is required to be included in income in the year received.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1995
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1995